Beijing’s Growing Voice in Washington
In April the Chinese Premier Wen Jiabao confessed that he and his country are “a little bit worried” about the safety of all the American debt it holds. To be honest, they have a right to be anxious. As of December, China held $727.4 billion in Treasuries - about 26% more than the $578 billion in U.S. government securities it held at the end of 2007. More than half of China’s nearly $2 trillion in foreign currency reserves are tied up in U.S. Treasuries and notes - including overextended mortgage giants Fannie Mae and Freddie Mac.
While President Obama injects a prescription to spend our way out of the current financial crisis, national debt and Chinese wariness regarding America’s credit-worthiness continues to rise. What is more disconcerting, however, is the transcendent influence the Chinese government seems to be wielding over our government.
Money Morning reported in September that despite rhetoric that the fading American housing market was the catalyst that drove the government to take control of Fannie and Freddie, it was actually prompted by outspoken concerns by China at the time. The Asian giant has taken to a form of investor activism in Washington, quietly threatening to stop buying our bonds or limit future investments in American debt if U.S. officials rebuff their ‘suggestions.’
This has led to a new awareness amongst Americans that our government has loosened the reins of liberty once again. Most Americans recognize that aspects of our sovereignty have vanished due to the global economic market and the tangling effect of insatiable international debt. While this reality is potently unpalatable to most of us, it is even more repugnant to witness the willingness of our leaders to relinquish what little autonomy we still maintain simply to appease the ‘concerns’ of China.
If government interferes with the market – however misguided that may be – it should always be predicated on market forecasts. In the weeks and months leading up to the passage of President Obama’s economic stimulus, the nonpartisan Congressional Budget Office (CBO) cautioned that the President’s economic recovery package would hurt the economy more in the long run than if he were to do nothing. According to CBO, Obama’s plan may help “in the short term but will result in so much government debt that within a few years [it] would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.” (Washington Times, “CBO: Obama stimulus harmful over long haul,” February 4, 2009)
Unfortunately President Obama is tuning a deaf ear to this advice. He seems more interested in adopting strategies to appease China. Yu Yongding, a former advisor to the Bank of China said last month that China should seek guarantees from the U.S. government that its holdings won’t be diminished by “reckless policies.” What form will these guarantees take? Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition explained that the Chinese will attempt to thwart policies that might impair their ability to access the U.S. market. “The Chinese are starting to flex their muscles, they are becoming more powerful commercially and economically, and they want us to know it,” stated Tantillo.
Chinese purchases of American debt are going to drop regardless of which policies Washington adopts. As the American consumer buys less and saves more China will have fewer dollars to invest in U.S. treasuries. While Premier Wen tries to hide Beijing’s investment of its dwindling export earnings in obscurity, the basic economics of the situation dictate a forgone conclusion. President Obama should do the math and base our economic recovery policies on what is best for America.
For its part, China wants a greater say in how international finance is regulated and managed. In a somewhat ironic turn of the tables, however, the Chinese are in a predicament of their own in trying to determine which strategy to force on The United States. When the U.S. government borrows and spends less it helps prevent interest rates from rising and, in turn, Chinese investment values are preserved. But less spending will translate into a slower economic recovery here at home, leading to less American demand for Chinese products. So what can we expect from the Chinese?
The answer: distractions. Premier Wen has made it abundantly clear that the focus of negotiations will be on how Washington – not Beijing – intends to grapple with the current economic crisis. What is not being publicly discussed is how Chinese exports dropped 17.4 percent in the first two months of this year compared to the same period last year, contributing to a record drop in Chinese trade that is breaking the entire Chinese economy (The New York Times, “China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries,” March 13, 2009).
The Chinese want to appear unscathed by the viral economic collapse. It is their intent to keep the focus on The United States rather than draw attention to their dwindling financial muscle. The President seems to be accommodating their objective by accepting an invitation to visit China during the G20 Summit in London last week after repeatedly assuring Premier Wen in public that America was a safe place to invest.
The President’s obsessive concern for any Chinese flight away from American investments is unnecessary. Many economists believe that China’s investment in American debt is now too enormous to sell. Should it ever try, it would be unable to sell its Treasury securities without flooding the market and driving down their price – something the Chinese would never do. “The only possibility, really, is that China will have to hold these bonds until maturity,” said Shen Minggao, the chief economist at Caijing, a Beijing-based business magazine. “If you start to sell those bonds, the market may collapse,” (The New York Times, “China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries,” March 13, 2009).
It’s time Washington stopped taking a back-seat to China’s investor activism. If the President wants to spend, spend. If Congress wants to borrow, then borrow. But our government should base these decisions on the long-term economic recovery of The United States, not on Chinese threats, that quite frankly, don’t hold water.